Even more so than Franklin Raines (#40), her boss at Fannie Mae, Jamie Gorelick was a total neophyte in mortgage lending. However, and like Raines, what she lacked in housing market experience she made up for with political connections. Franklin Raines had experience as a budget director and was at least somewhat familiar with numbers and Microsoft Excel. Gorelick on the other hand was a lawyer and had served as deputy attorney general during the Clinton administration. She had virtually no experience in finance at all! In her capacity as deputy attorney general, Gorelick is best known as the author of the “wall memo” which prohibited the federal government’s intelligence services from sharing information with local law enforcement officials. Many people believe this policy helped to allow the 9/11 attacks to occur.
As far as Gorelick’s role in the housing bubble is concerned, she was an ardent supporter of President Clinton’s central plan for housing, and actively tried to achieve Clinton’s goals via Fannie Mae. Here is Gorelick in October 2000 explaining to the American Bankers Association that because of the 50% affordable housing mandate dictated by Andrew Cuomo (#16), Fannie was now willing to purchase risky or “tough” loans – i.e. loans that could very well default. The abbreviation ‘CRA’ refers to the Community Reinvestment Act. The CRA was modified by the Clinton administration to place additional legal pressure and public scrutiny on banks, and thus compel them to issue many more mortgages to low and moderate income borrowers. Of course the modifications to the CRA – like the 50% affordable housing mandate edict from Andrew Cuomo - were all being implemented to advance President Clinton’s homeownership goal;
“Under our community investment mandate, HUD will soon require us to dedicate 50% of our business to low- and moderate-income families…Your CRA business is important to us…Some people have assumed we don’t buy tough loans. Let me correct that misimpression right now. We want your CRA loans because they help us meet our housing goals. Last spring Fannie Mae pledged to provide $2 trillion in housing finance to 18-million under-served families before the decade is over…Helping banks meet their CRA goals is crucial to meeting our goals...we can help you meet your lending goals in two ways. We will take CRA loans off your hands – we will buy them from your portfolios, or package then in securities – so you have fresh cash to make more CRA loans…We will also purchase the CRA mortgages you make right at the point of origination. You can originate CRA loans for our purchase with one of our CRA-friendly products like our 3% down Fannie 97”
Gorelick’s speech highlights the enormous importance of the 50% affordable housing mandate promulgated by Andrew Cuomo to the development of the entire crisis. As Gorelick – and simple common sense - makes clear, the only way for the GSEs to tie up 50% of their capital – which was measured in the hundreds of billions of dollars – in loans to low and moderate income borrowers was to lower lending standards. Only by lowering lending standards and getting involved with “tough” loans would the GSEs be able to issue so many new loans to low and moderate income borrowers. Indeed, in March 2000 Franklin Raines, the then CEO of Fannie Mae, said that Cuomo’s 50% affordable housing mandate would force Fannie to become a “major presence” in the market for sub-prime mortgages.
Note also the tiny down payment - 3% - Fannie is now willing to accept. Historically down payments of 20% or so were the best way a borrower could demonstrate fiscal discipline and a steady income to a lender. In addition, a sizable down payment also assured a lender that the borrower had enough “skin in the game” to not simply walk away from a mortgage. It was no accident then that down payments of this size had long been one of the most important factors in keeping mortgage default rates low.
With the evisceration of lending standards – down payments in particular - to meet President Clinton’s homeownership goals and Andrew Cuomo’s 50% affordable housing mandate target, no one should be surprised that eventually hundreds of billions of dollars in mortgages issued by the GSEs went up in smoke. The best evidence of the enormous losses suffered by Fannie as a result of President Clinton’s central plan for housing as well as the attendant ineptitude of Gorelick, Raines, Cuomo and others is provided by the events of September 05, 2008. On that day, the government placed Fannie Mae in “conservatorship” – essentially taking over the company – and injected $100-billion of capital into Fannie Mae – and another $100-billion into Freddie Mac for that matter - to stave off insolvency. More money – perhaps another $100-billion - was subsequently injected into Fannie on December 24, 2009 – a date obviously chosen to minimize media scrutiny and public outrage.
See Bill Clinton (#12) for the “strategy” – read “central plan” - to increase homeownership levels to all-time highs. See Henry Cisneros (#11) and Andrew Cuomo (#16) for more details on the affordable housing mandate. See Cuomo for the completely reckless decision to expand the affordable housing mandate to 50%. See Shaun Donovan (#18) for his completely bogus explanation for why the GSEs had little to do with the housing crisis. See Franklin Raines (#40) for more Fannie Mae malfeasance and the enormous significance of Cuomo’s 50% affordable housing mandate. For the most zealous congressional supporters and defenders of the GSEs, Franklin Raines and Jamie Gorelick - see Kit Bond (#6), Barney Frank (#21), Gregory Meeks (#35) and Maxine Waters (#47).